The World Economy Goes Hollywood

In a world where “nobody knows anything,” investors may be no better than film-studio moguls at predicting the future. If so, then markets, instead of being predictive, become increasingly reactive, simply extrapolating recent events.

LONDON – If there is one useful conclusion that economists and investors can draw from the crazy year that has just ended – indeed, from the whole crazy decade since the Global Financial Crisis of 2008 – it is this: As they say in Hollywood, “Nobody knows anything.” In the film industry, the richest and most experienced studios and producers spend vast amounts of time and money on audience research, but still have no idea if their latest creations will turn out to be hits or flops. So why be surprised if the same is true of financial markets – or, for that matter, of commodity prices, policymaking, and corporate performance?

Why be shocked if the world’s richest company admits, as Apple did after Christmas, that it has no idea how many iPhones it will sell in China? Or if the world’s best-informed energy traders predict a global supply shortage that will boost oil prices above $100, just when a supply glut sends the market tumbling to $50? Or if the US president doesn’t know if he hates or loves global trade? Or if stock markets predict a global economic boom when bond markets predict recession and then both reverse suddenly, contradicting each other in the opposite direction?

At this time last year, economic expectations were almost universally optimistic. Every region of the world appeared to be simultaneously booming for the first time since the 2008 financial crisis. Central bankers were confident that they could safely start to withdraw their extraordinary monetary stimulus, and stock-market investors were almost unanimously bullish. Yet 2018 turned into the worst year for investors since the financial crisis, forcing central bankers to begin backing away from their plans to normalize monetary policy, economists to downgrade their growth forecasts, and many businesses to prepare for recession in 2019 or 2020.

To continue reading, subscribe now.

Already have an account or want to create one to read two commentaries for free?
Log in

Support High-Quality Commentary

For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world's foremost leaders and thinkers on the issues, events, and forces shaping their lives. At a time of unprecedented uncertainty, that mission is more important than ever – and we remain committed to fulfilling it.

But there is no doubt that we, like so many other media organizations nowadays, are under growing strain. If you are in a position to support us, please subscribe now.

As a subscriber, you will enjoy unlimited access to our On Point suite of long reads and book reviews, Say More contributor interviews, The Year Ahead magazine, the full PS archive, and much more. You will also directly support our mission of delivering the highest-quality commentary on the world's most pressing issues to as wide an audience as possible.

By helping us to build a truly open world of ideas, every PS subscriber makes a real difference. Thank you.

Anatole Kaletsky is Chief Economist and Co-Chairman of Gavekal Dragonomics. A former columnist at the Times of London, the International New York Times and the Financial Times, he is the author of Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis, which anticipated many of the post-crisis transformations of the global economy. His 1985 book, Costs of Default, became an influential primer for Latin American and Asian governments negotiating debt defaults and restructurings with banks and the IMF.

1) As the expansion ages, complacency increases.2) As complacency increases, risk and fear of past economic cycle troughs is erased.

Less fear and more complacency inevitably lead to less careful assumption of economic risks. The build up of such risks into the economic process is the seed for the instability of the economic expansion. Regardless of its duration!

Once the cycle is structurally unstable, any minor negative and unexpected input is magnified and makes the instability a totally destabilizing factor for the whole economic expansion. Nobel Laureates have published numerous studies about that.

According to your article, it is the opposite. Which is tantamount to saying that any financial tightening will cause a shock in any economic expansionary cycle. Duly untrue according to historical data. It is when the cycle is unstable, that (e.g.) a given financial tightening cycle bursts the economic expansion.

And it is the level of prior instability together with the seriousness of the incoming negative external shock that together determine the depth and duration of the economic recessionary cycle.

Sometimes the structural economic instability is so deeply rooted that not even a negative external shock is needed to sink the boat, just the absence of good news will do it. Think decades of Japan...

“Nobody knows anything”? Indeed, but at least the regulators think they know, when setting their capital requirements for banks based on that what is perceived risky is much more dangerous to our bank systems than what’s perceived safe. Loony!http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

"they could safely start to withdraw their extraordinary monetary stimulus"

Don't you mean irresponsible monetary stimulus? Keeping interest rates so very low so very long let to major distortions in all markets. We live in a time of Rigged Markets and it is not clear that we can get out without much greater disruptions than would have resulted from not entering this idiocy in 2008.

Time has a way of revealing certain realities but does so at its own choosing. The economy is far from a well-oiled and designed machine and in the end, we may find that it is not really completely under the control of those who have been placed in the driver's seat.

In a world where central banks have become so deeply involved in manipulating and distorting markets we find true price discovery no longer exist. The question remains how best to prepare for an economic meltdown. Expect both luck and caution to play a big role in our individual fortunes as we move through the financially violent period before us. More on this subject below.

New Comment

It appears that you have not yet updated your first and last name. If you would like to update your name, please do so here.

Pin comment to this paragraph

After posting your comment, you’ll have a ten-minute window to make any edits. Please note that we moderate comments to ensure the conversation remains topically relevant. We appreciate well-informed comments and welcome your criticism and insight. Please be civil and avoid name-calling and ad hominem remarks.

Mass protests over racial injustice, the COVID-19 pandemic, and a sharp economic downturn have plunged the United States into its deepest crisis in decades. Will the public embrace radical, systemic reforms, or will the specter of civil disorder provoke a conservative backlash?

For democratic countries like the United States, the COVID-19 crisis has opened up four possible political and socioeconomic trajectories. But only one path forward leads to a destination that most people would want to reach.

Log in/Register

Please log in or register to continue. Registration is free and requires only your email address.

Emailrequired

PasswordrequiredRemember me?

Please enter your email address and click on the reset-password button. If your email exists in our system, we'll send you an email with a link to reset your password. Please note that the link will expire twenty-four hours after the email is sent. If you can't find this email, please check your spam folder.